Customer experience and price pressure: why do customers seek discounts?

Tis the season to be shopping! While many forecasts point to a decline in holiday spending, the National Retail Federation forecasts holiday sales to grow 4 percent to $474.5 billion, down from 4.6 percent growth from the previous year.

However, according to the NPD Group’s October survey, 41 percent of consumers plan to put off holiday shopping until late November, in part because they have come to expect deep discounts later in the season. Everyone or at least a growing number of consumers are looking for deals!

Retailers are under growing price pressure as competition in their respective industries intensifies, and customers demand stiff discounts. Companies are faced with such a high degree of customer unwillingness to purchase products at their listed prices, that some companies are opting to offer substantial discounts BEFORE the holiday period.

While companies blame intensified competition (particularly from the web) as the source customer demands for discounts, they are unable to explain why some companies never have, and most likely, never will offer discounts of any kind.

When was the last time you demanded a discount from a Starbucks barista for your latte? Ever try negotiating a price reduction on your Four Seasons or Ritz Carlton hotel room? How about demanding a better interest rate from Commerce Bank for your savings account? What about negotiating a lower fare on Virgin Atlantic or Singapore Airlines? If you have ever done business with any of these companies, the answer is never!

The truth behind discounting is very simple. Customers seek lower prices either when they do not see sufficient value in the product or service, or because they believe that the delivered value will not match the promised value. Stated otherwise, customers will demand lower prices because they do not find that the product price will represent the product or experience promise.

Companies that consistently delight customers with superior quality experiences will rarely have to worry about price pressure. They understand that consumers recognise the value delivered – be it in a coffee cup, hotel room or airplane, and will pay accordingly. Only when customers perceive that the experience delivered fails to live up to its promise will they demand future discounts.

Living up to expectations

A recent Strativity Group study found that while a minority of customers seek discounts due to budgetary constraints, the majority do so because of experiences in the past where products or services failed to live up to expectations. The surveyed customers sought discounts to protect themselves from broken promises. Since they anticipated that the value promised (for products or services) would not reflect value delivered, they were unwilling to pay the list price or full cost for the product or service.

In a business to business environment, the thinking goes along the lines of: “If my boss will blame me for a project’s failure, at least I can show that we got a discount.”

Whenever your organisation experiences price pressure, ask yourself these two questions before rushing to slash list prices or offer steep discounts on a customer-by customer basis:

1. Do our products and services deliver sufficient value to merit their current prices?
2. Do we ensure that the value promised reflects value delivered?

If you don’t know the answers to these questions or if the answer is 'no', expect customers to seek discounts. When customers fail to see the value in your products or services, they will view them as little more than commodities that deserve the lowest possible prices.

To shift away from the perception that your products and services are commodities, focus heavily on creating and delivering superior value through distinct customer experiences. This value and these differentiating experiences will in turn, command higher list prices. At the end of the day, you have a difficult choice – either invest in the creation of differentiating experiences worthy of the prices your products command, or start handing out discounts for your commodity experience.

Recent articles by Lior Arussy

Lior Arussy is the president of Strativity Group and the author of several books. His latest book is Passionate & Profitable: Why Customers Strategies Fail and 10 Steps to Do Them Right! (John Wiley & Sons, 2005). To learn more about customer strategies, sign up for Lior’s newsletter at www.StrativityGroup.com